The investing world is complex. I learnt to comfortably navigate it after years of studying and working in different roles – but it can be especially overwhelming for new investors who are considering or have just taken the brave & wise decision to make their money work for them. A good place to start is to first understand the securities and investments ecosystem – who are the actors, what are their roles, the common investment avenues, etc. It won’t help you get rich instantly, but it will give you an idea how to take steps on your investment journey.
Personally, I feel that once I understood how the investments ecosystem functioned, it became a lot clearer to understand the roles, responsibilities, and motives of each participant – and identifying what was best for me became a lot easier. I hope this broad guide helps you achieve the same.
1. Market Participants are the people and organisations who invest money in the capital markets either directly themselves or indirectly via intermediaries. The two broad types are:
- Retail Investors: are individual people like you & me. Often times when retail investors invest or own assets above a certain amount, they are categorised as high-networth individual (HNI) investors
- Institutional Investors: are recognised investment pools (e.g. mutual funds, hedge funds), corporations (including banks), and organisations (like trusts, charities). They can be either domestic or foreign. Due to their large asset base, institutional investors have a higher share of investor participation & tend to be market movers
2. Assets are what market participants invest in hoping to get a certain return on their investment. Commonly popular asset classes include:
- Fixed Income: are financial assets that provide a pre-defined fixed return over a certain time period. Fixed Deposits (FDs) are an example, and the most common investment in India
- Commodities: are physical assets like gold, silver, sugar, etc. that are traded and used as a store of value
- Equities: are financial assets that give ownership (or a share) in a company – in exchange for the investment, the investor gets a share in the profits and the growth of the business
- Real Estate: are physical assets like land or residential/commercial properties
3. Instruments help people access or invest in a particular asset. The most popular instrument forms are:
- Direct: this is the classic form where an investor directly owns the asset. It can either be in physical form (land, share certificates, gold, etc.) or electronic (demat shares, digital gold, etc.)
- Mutual Funds: a financial innovation from the 1920s, mutual funds are a common pool of money contributed by multiple investors:
- It is managed by a fund manager with a defined objective
- In exchange for their investment, investors get units to a diversified portfolio of stocks (in case of equities)
- Investors pay an expense ratio (a % of the total amount invested) that takes care of fund management and other operational expenses like transaction costs, marketing, accounting, etc. This is deducted on a daily basis
- Exchange Traded Funds (ETFs): invented in the early 1990s, an ETF is also a basket of securities (like a mutual fund), except they trade on exchanges where investors can buy/sell their ETF units. ETFs combine the diversification benefits of mutual funds with the liquidity advantages of single stocks
- smallcases: the latest financial innovation created in 2015, smallcases are diversified portfolios of stocks or ETFs that follow a defined investment strategy or theme/sector. They provide investors with direct ownership of stocks and have no expense ratios. Instead, investors pay a standard brokerage (approx. 0.3%) only on the transacted amount – if and when they transact, not daily.
4. Securities and Exchange Board of India (SEBI) is the official regulator of the capital securities market in India. It was established in 1988 and given statutory powers by the Parliament of India through the SEBI Act, 1992. The entire securities and investments ecosystem – all market participants, infrastructure providers, and intermediaries – come under the purview of SEBI.
5. Infrastructure Providers are companies/organisations that facilitate/monitor the creation & transaction of various instruments in the capital markets & provide the physical and digital infrastructure required for it
- Asset Management Companies (AMCs): also known as Mutual Fund Houses, they create, launch, and run different mutual funds schemes. Different AMCs like HDFC Mutual Fund or Reliance Mutual Fund offer mutual fund schemes that are similar in objective but may vary on characteristics like fees, fund management style, etc. As of March 2019, there are 44 AMCs in India and the 3 largest in terms of Assets under Management (AuM) are:
- HDFC Mutual Fund with 3,42,290 crores in AuM
- ICICI Prudential Mutual Fund with 3,20,792 crores in AuM
- SBI Mutual Fund with 2,83,806 crores in AuM
- Association of Mutual Funds of India (AMFI): As the name suggests, it’s a private association of all the 44 active AMCs in India. AMFI is a recognised industry standards organisation for the development and promotion of mutual funds in India – in fact, they were the ones that sponsored & launched the catchy and successful “Mutual Funds Sahi Hai” campaign
- Exchanges: are places to buy/sell stocks and securities. The 2 main exchanges in India are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), which also happens to be Asia’s first stock exchange
- Depositories: are private companies registered with the regulator who hold instruments in electronic form (aka demat or dematerialised) on behalf of the investors
- Transfer shares between accounts when trades are made
- Perform various backend functions like accounting, statements, etc.
- Holdings/accounts are consolidated across brokers registered with that depository
- There are 2 depositaries in India – Central Depository Services Limited (CDSL) and National Securities Depository Limited (NSDL)
- Registrar & Transfer of Agents (RTAs): are private & independent companies that are kind of like the depositary equivalent for mutual funds:
- RTAs record the various trades (redemption, subscription, transfer, etc.) made by the investor
- Perform related backend functions like accounting, investor statements, etc.
- Similar to depositories, end investors have very limited interaction with RTAs and the most frequent form of engagement is receiving consolidated account statements from them
- Holdings/accounts are consolidated across different AMCs registered with that RTA
- CAMS and Karvy are two of the largest RTAs in India and do
6. Intermediaries are individuals or companies that are licensed by the regulator SEBI to perform certain tasks/functions in the capital markets & investments ecosystem
- Brokerages: are organisations that enable investors to place orders on the exchange for a brokerage fee. Investors can do so directly via their brokerage account, or via dealers employed by brokers. Often times, brokerages also provide additional services like advisory, research, etc.
- Certified Financial Planners: a commonly-used term, but has no official standing in India unless these planners are also registered with SEBI to give investment & financial advice
- Dealers or Stock Brokers: are individual members of stock exchanges (and usually employed by brokerages) who can place orders on behalf of clients, thus allowing them to trade
- Depository Participants (DPs): are usually brokerages registered with depositories who add/remove stocks and securities from the investors’ accounts with the depositories depending on whether the investor completed a buy or sell order. There is usually no DP fees for a buy order & a flat DP-fee for sell orders that varies across brokerages
- Distributors/Agents: are individuals (can be independent or employed by investment firms or brokerages) that sell mutual funds to investors. In exchange, they get a commission that comes from the expense ratios charged to all investors. Distributors are registered with an AMFI Registration Number (ARN), but aren’t authorised by SEBI to give financial and investment advice since an advisor has fiduciary obligations
- Research Analysts (RAs): are SEBI licensed professionals whose business activity is research analysis or are involved preparation/publication of research reports on capital market investments. They can be either in an individual capacity or as part of a larger firm (e.g. brokerages). Note though, RAs cannot provide investment advice
- Registered Investment Advisors (RIAs): are investment professionals registered with SEBI to provide financial planning and investment advice on equities and other capital market securities. All RIAs can perform the functions of RAs
- Portfolio Managers (PMs): are authorised by SEBI to fully manage, i.e. have full legal control over a client’s portfolio in order to completely manage it on the client’s behalf. These can be individuals or firms (e.g. AMCs offering mutual funds, firms with Portfolio Management Services, etc.). All PMs can perform the functions of RIAs.
This list is certainly not exhaustive, and it’s not meant to be – instead, it’s aimed at explaining common terms & actors in the investments ecosystem that most people come across when they start (and continue) their investing journey. If you found this article helpful, please share it with someone who is new to the world of investing
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